Protecting your retirement income

When taking out a guaranteed retirement income product (an annuity) you can protect your income and provide extra financial security for your partner or other beneficiary if you die early by adding a ‘guarantee period’. Another way is to add ‘value protection’ which might provide a lump-sum death benefit.

Guarantee period

How a guarantee period works

Having a guarantee period means your retirement income will be paid out for a specific number of years from the time the income starts even if you die.

For example, if you take out a guaranteed retirement income with a 10-year guarantee period and die after two years, the payments would continue for eight more years.

Guarantee periods are usually for five or 10 years but under new rules introduced in April 2015 they can now be for as long as you wish.

Bear in mind that adding a longer guarantee period will reduce the amount of income you get.

A single life retirement income product (also known as a single life annuity) with a guarantee period won’t be a good enough substitute if your partner or other beneficiary needs a guaranteed income for life. You would be better off with a joint income product, which guarantees to keep paying an income to your partner or beneficiary, for life, after you die.

Some providers allow you to have both a joint guaranteed income product and a guarantee period, but check how your provider will treat this, as they can differ. It is usual for the survivor’s income to start being paid once the guarantee period has run out, but there may be other options, depending on the provider.

A single life income with a guarantee period could be suitable where you have a dependent whose life expectancy is shorter than yours, or who you only need to provide for up to a certain time and you want them to be financially secure if you die unexpectedly before them.

But remember, the payments will stop as soon as the guarantee period ends and if you outlive the guarantee period there will be no payments at all.

What does it cost?

Adding a guarantee period isn’t expensive.

The reduction to your retirement income is minimal compared with the added protection it provides should you die in the early years of your retirement

Tax on the inherited income

If you die before age 75 your dependant or other nominated beneficiary will receive the inherited retirement income tax-free.

If you die age 75 or over the inherited income will be added to your beneficiary’s other income and taxed in the normal way.

If you need to provide for a dependant for life after you die, a single annuity with a guarantee period is not a suitable alternative to a joint annuity as any income from the guarantee will stop when the period runs out.

Lump-sum death benefit – ‘value protection’

This benefit ensures that when you die, your estate or beneficiaries receive a lump sum which is the difference between the amount you paid for your retirement income product and the gross income (that’s the payments made before tax) you received before you died.

If you have already received back more than you paid for your income, there will be no lump sum death benefit when you die.

This option, which is less commonly used than guarantee period, is also known as ‘value protection’ or ‘capital protection’.

Tax on the inherited lump sum

If you die before age 75, any lump sum payment will be paid tax-free.

If you die age 75 or over any lump sum due will be added to the beneficiary’s other income and taxed in the normal way.

What does it cost?

Adding a lump sum death benefit option means your retirement income will be lower than having no protection.

Be sure to shop around and get advice if considering this option.

Get advice before taking out a guaranteed income product (an annuity)

Once you take out an annuity you can’t change your mind – and it’s just one of several options you have for taking your pension.

So it’s important to be sure it’s the right choice for you.

For an overview of all of your options and to find out where to get help and advice, including free government-backed guidance from Pension Wise, see our guides below: